Discussion Paper Details

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Title: What's Wrong with Fiscal Space?

Author(s): Charles Wyplosz

Publication Date: February 2020

Keyword(s): Counter-cyclical fiscal policy, Fiscal space and intertemporal budget constraint

Programme Area(s): Macroeconomics and Growth and Monetary Economics and Fluctuations

Abstract: The concept of fiscal space, often discussed in European policymaking circles, is intuitively appealing but fraught with daunting challenges. In principle, it is meant to indicate how expansionary fiscal policy can be in the short run given longer term concerns. The proper basis should be the intertemporal budget constraint, but that is not what the Commission does. This paper suggests how to use the constraint to evaluate the fiscal space. Instead of aiming at a single number (with or without confidence intervals) it transparently links the computation of the fiscal space to explicit assumptions about the unknown future.

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Bibliographic Reference

Wyplosz, C. 2020. 'What's Wrong with Fiscal Space?'. London, Centre for Economic Policy Research.